Blog:SABMiller outed over Foster's Group approach

Foster's isn't the worst deal that SABMiller could do, but I'll wager that the Peroni brewer went public through gritted teeth.

SABMiller didn't want to go public this soon, mindful that the news would push up Foster's share price. On a conference call with analysts earlier today (21 June), SAB's CEO, Graham Mackay, kicked off with: "We would have preferred to have had discussions with Foster's board in advance of such a presentation."

I'm willing to bet that his private reaction was a little less diplomatic. Following the surge in Foster's shares today (21 June), up 13% to AUD5.14, it looks certain that SABMiller will have to improve its offer it really does want to acquire Foster's. So far, it has offered AUD4.9, albeit in a suitcase of hard, cold cash.

This could prove tricky. SABMiller probably wanted to snatch Foster's at a reasonable price on the quiet. The Australian brewer is suffering in a lacklustre market, but it would generate strong cash and, at the current offer price, will likely improve SAB margins over the short-to-medium term. Plus, as just-drinks managing editor Olly Wehring put it today, Foster's is there.

Now, Foster's clearly wants more money, spurred on by share price gains. But, the thinking is that SAB will struggle to reap enough reward if the price tag rises much further. Today, SAB offered 12.5 times Foster's estimated EBITDA for fiscal 2011. Sanford Bernstein, though, has said that a bid price equivalent to even 12.7 times EBITDA looks expensive relative to the potential for synergies and net sales growth.

On a conference call this morning, SABMiller sought to bamboozle investors with a plethora of polished figures on Australia. At one point, analysts were told that the average Australian needs to work just 12 minutes to afford 500ml of mainstream beer. This is less than in Canada and Spain, apparently. I wonder how much beer the guys at JP Morgan (SABMiller's adviser group) earned per minute to deliver little gems like that?

Still, analysts questioned what strategic ethos lies behind the move. It is well-known that the brewer does not lack firepower. Perhaps SABMiller doesn't see anything else coming up for a while? Perhaps this is Graham Mackay's swansong?

Whatever its priorities, SABMiller will have to work hard if it wants to convince investors to back a higher bid.